March 18, 2024 - 1:00pm
“Our economy is the envy of the world!” boasted Joe Biden in his State of the Union address this month, effectively launching his re-election campaign. He went on: “15 million jobs in just three years — that’s a record! Unemployment at 50-year lows. 800,000 new manufacturing jobs in America and counting. Wages keep going up and inflation keeps going down!”
If “it’s the economy, stupid,” as Bill Clinton’s political strategist James Carville famously put it during the 1992 election, you’d think the President would be a shoo-in. Except that people aren’t buying it. Polls and betting markets give Trump a clear edge in November’s election. Rather than credit Biden for an economy which is leaving America’s G7 peers in the dust, many voters are looking back nostalgically to his predecessor’s time in charge.
New data shows that Americans are still shaken up by the inflation surge of the pandemic, and the ham-fisted way central banks dealt with it. The US Federal Reserve allowed prices, including asset prices, to soar into orbit and then — when it realised its mistake — clamped down hard with punishing rises in interest rates. So now voters face higher prices, more expensive homes, and mortgage rates that suck up more of their income.
While it’s all well and good for Biden to tell Americans that inflation is coming back down, his basic problem is that ordinary people don’t measure it the way economists do. To an economist, inflation is the rate of change in prices. To a typical consumer, it’s the level that matters. And what American consumers know for a fact is that prices today are much higher than they were two or three years ago, raising their cost of living.
Nor will it improve between now and election day. On the contrary, recent inflation reports point towards its levelling off in a 3-4% range rather than continuing down towards the 2% target the Federal Reserve has set. With oil prices recently breaking back above $80 for the first time since last year, Americans, who given their dependence on automobiles attach particular weight to the prices they pay at the gas pump, will face regular reminders of how expensive life has become. Stubborn inflation will also cause the Fed to delay interest-rate cuts, which means their mortgage rates won’t be coming down any time soon.
But if the situation looks bleak for Biden it’s not yet hopeless, because he has one ace he may yet be able to play. Prices won’t return to previous levels, but wages are currently rising faster than prices. Not by much, only about 1-2% annually. But should that continue, Americans will have a little more money left at the end of each month, and it will slowly accumulate. It would take a few years of such real wage gains for them to make up all the ground they lost during the pandemic. Nevertheless, if the trend continues they’ll have started to feel their belts loosening slightly come the November election.
What’s more, if interest rates stay high through the year, house prices will probably continue the decline they recently started. The cost of housing will also thus become gradually more bearable. So on a straight “are you better off than you were four years ago?” question, Biden won’t be able to beat Trump in November. But he may have a sufficiently plausible case for saying that if they stick with him, Americans will be better off in another four years than they would otherwise.
To use that old metaphor from American football, therein may lie the Hail Mary play that rescues his presidency.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeInterest rates higher for longer, money supply will continue to expand to suport roll over refinancing (there is no contraction in real terms, they just changed the source of liquidity). Inflation guaranteed. They’ll sequester Russian assets, then they’ll need a war. Forgive.l my.l cynicism, but this playbook is well worn. We are travelling in a rhyming direction.
The numbers might look good, but Americans don’t trust the numbers. They don’t trust the media. They don’t trust the government. They don’t trust corporate America. Trust is lost quickly but gained back slowly. The government, Wall Street, and the corporate world have had decades of mistakes that led to lost trust. The Iraq war, the bank bailouts of 2008, inflation, the pandemic, closing factories, falling wages, rising inequality. Maybe the author is right and maybe things are changing, but the problem is time. In an environment where there is no trust, people will believe only what their immediate experience tells them and they won’t believe it immediately. The establishment will have to keep having these good economic numbers AND have them translate to better outcomes at the grassroots level, and it will have to last for a considerable period of time before trust is rebuilt. Needless to say, eight months is insufficient, and who knows what can happen in that time. The most likely thing to happen is ‘nothing of note’, a continuation of the current dynamics which suggest Biden is losing. Any other economic hiccup or disruption, though, is likely to hurt Biden. Biden’s best and only strategy remains to ramp up the attacks on Trump and hope enough people dislike Trump enough to vote for Biden.
20% inflation during his term. That is all.
The US Federal Reserve allowed prices, including asset prices, to soar into orbit and then — when it realised its mistake — clamped down hard with punishing rises in interest rates.
Is it really a mistake when the consequences of action or inaction are foreseeable? This gives the Fed far more credit than it deserves. These are not stupid people. They understand correlations, causal links, and relationships between decisions and results. When an action is virtually guaranteed to result in a specific action and you proceed with that action, then the result is intended.
That’s true, but there’s one more factor that the article omits: in the US, Biden and his Democrat friends in congress rammed through enormous amounts of (essentially) printed money to pay people to not work for longer, plus enough “green” (scam) pork to choke a horse.
The US Federal Reserve bought or sold bonds in order to defer the inflation impact for as long as he could (while everyone knew that the price of groceries and gas were soaring). Of course, we wish now that they hadn’t, but they had to only because of Biden’s socialist spending was off the charts.
This is another reason why Americans no longer trust the “core” inflation (which excludes gas and groceries.
I don’t completely disagree with you but Command and Control Economies tend to rely on a Faith Doctrine. The Doctrine basically holds that once sufficient control is ceded to the Central Planner to stem a “Crisis” than things will stabilize.
The problem with this doctrine is that ignores tradeoffs and whether those tradeoffs might be more problematic than the original crisis. If you look at Equitable Redistributionism, Keynesian Economics, Hamiltonian Economics or Bailouts, the general idea is that the Government will assume the debts of those “unable to pay” in order to create eventual price stability.
I always point out that raising the minimum wage is inherently inflationary but I don’t necessarily think it’s done to create more inflation. Its done for two reasons 1) To reduce wage inequality between the working poor and the middle class and 2) As a Virtue signal to a large segment of voters that assume the concept is righteous.
I think the second point is more relevant. Most people do not understand prices but they understand “Inequality Rhetoric.” Until the working class begins to understand the difference between rhetoric and outcomes, you’ll continue to see counterproductive planning that embraces “virtuous rhetoric” and problems will all be pinned on “Corporate Greed” or “Price Gouging.”